Snapshot Notes - November 14, 2006

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TUESDAY, NOVEMBER 14, 2006

PostCloseSummary

11/14/06 5:00 PM EST

This morning, we saw the major indices open higher, then immediately sell off and hold into the lunch hour.

At the time, it looked like a pretty decent bet that we were seeing yet another manifestation of waning momentum after the peak we saw last week. But short-term oversold conditions (according to the STEM.MR model) once again coincided with another market low, and the indices went on to score new highs.

Much to my frustration and chagrin, I've mostly ignored those short-term oversold readings from our models due to the peak momentum readings we had seen. Unlike prior instances in the past few months, the recent momentum extreme has not had much of an impact, as the indices have continually battered away at new highs.

My concerns have been that due to the momentum extreme we saw last week, and the precarious nature of some of our intermediate-term composites that I mentioned this morning, further rally attempts would be limited and likely given back over the coming weeks/months.

Given that outlook, I haven't been all that eager to embrace the long side other than for some short-term ins and outs. I've been fooled more than once lately, but I'm in that camp again - the breakout above 139 in the S&P 500 proxy, SPY, is classic and should lead to further short-term rally attempts as long as that area holds. With many of our short-term indicators back into overbought extremes, I won't be chasing prices higher, but would look for something of a pullback first.

Have a good evening and we'll see you tomorrow!

ApproachingTheBell

11/14/06 3:25 PM EST

Wow. I'll be honest with you, folks - this market has been one tough nut for me to crack lately on a short-term basis.

In hindsight, we had three short-term oversold readings in the past week according to the STEM.MR model, and all would have been good short-term buying opportunities. For various reasons, I didn't trade along with them, and have been either flat or scraping along with small gains and losses as a result.

Yesterday, I wrote about the 139 level on the S&P 500 proxy, SPY. It was as clear a resistance level (in the context of an ascending triangle) that we'll ever see. This afternoon, as that level was breached, we saw a moon shot on tremendous volume as traders piled in on the breakout.

Todd Harrison of Minyanville put it best...

"Why the SPY fly? Simple - 120,000 S&P e-mini futures traded when S&P 1389 was breached. We asked...how many "buy stops" were waiting on the other side of that ride. The answer, on a notional basis, was $8 billion worth."

That's quite a shot that was spent in a very short amount of time, and now we'll see how traders treat the first reaction back to the breakout point. On a chart of SPY, a low-volume pullback towards the 139 area will be so classic that it will be standing out to every short-term trader, and I imagine that first retracement will bring in another round of buying interest. If we get that pullback and begin to head up again, then I'll try to ride along for a bit.

LunchtimeLull

11/14/06 12:25 PM EST

For the second time in less than a week, the Nasdaq 100 may be forming a reversal day, whereby it shoots to a new six-month high then reverses to close below both its opening and previous closing prices.

Since the bull market began in 2002, this would be the fifth such occurrence of two closely-compacted reversal days. The others (which all occurred in 2003 or very early 2004) are indicated on the chart below:

The day is only half over, so obviously I'm getting a little ahead of myself here...if the NDX turns around and rallies into the close, then the chart above will be moot (unless we get another new high and reversal tomorrow), but I thought it was interesting to see how unusual this situation would be.

Other than this potential reversal cluster, I don't see much that's intriguing to me. I don't particularly like the short side for the reasons listed earlier, and the long side isn't exactly screaming to me either given the lack of momentum. I'm sitting out and waiting for something better, though aggressive traders might want to look for a spike lower if the NDX loses that 1760 level.

MidMorningOutlook

11/14/06 10:15 AM EST

Good Tuesday morning...Yesterday I wrote about the flag pattern in the S&P 500, something that most short-term traders almost certainly had on their radars.

It became rather loose and extended, which isn't what you want to see if trying to anticipate a breakout, and I was shying away from doing just that - rather I was more interested in reacting to the move more than anticipating it. I'm not comfortable as a breakout trader, and that goes doubly so when we have already seen a peak in momentum and have dubious longer-term sentiment conditions.

Given the consolidation pattern that formed most of yesterday, the fact that the Nasdaq 100 was able to hold above its prior highs, and the lack of overbought extremes among a confluence of our short-term guides (the cumulative TICK for the NYSE even hit an oversold extreme yesterday afternoon), if the buyers have any oomph left at all, then we should see another attempt at a rally. They haven't been able to get anything going this morning, which adds weight to the idea that it might be a rough row to hoe trying to anticipate a breakout.

Even if we do turn this morning and break out, other than in the very short-term I remain unconvinced that yet another push is going to be sustainable. We can look at any number of our composite guides, from the Intermediate-term Indicator Score, to the AIM Model to the Smart/Dumb Money Confidence, all of which are flashing yellow lights about the intermediate-term.

Each week, I've briefly touched on the position of large commercial traders in the index futures, and how they've been increasing their hedges against the equity market. With the latest report that was released yesterday, we see that once again they increased those hedges, and are now holding a new all-time record net short position of $40.3 billion. Again, this says absolutely nothing about the short-term, but it does suggest that when looking out over the next several months, it seems unlikely that we'll see continued sustained upside.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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